has been stuck at for nearly four years due to competitive pricing, frugal consumer spending and the lack of any "must have" toys.
More than likely, the results will reflect the holiday sales performance of Toys "R" Us, which reported a 1.4% drop in revenue and a 2.2% decline in same-store sales. Those numbers aren't bad compared to the 5% decline Toys "R" Us suffered during the holidays in 2003 but won't inspire newfound confidence in an industry that's moving away from the specialists as mass merchants continue to gain market share.
The small improvement over last year shouldn't hurt Toys "R" Us' efforts to attract suitors for its 685 U.S. toy stores, who are reported to include Target and Kmart. "The results weren't bad enough to turn anybody away or good enough to attract anybody new," said Scan McGowan, an analyst with Harris Nesbitt. He added that "we still believe the toy and babies business will be separated."
Despite the drop in business, Toys "R" Us ceo John Eyler told analysts during a January conference call that the retailer "was competitive on price with the major discounters" such as Wal-Mart and Target. And he said Toys "R" Us "held our own in a tough environment," and did well considering that toy sales industry-wide fell during the holidays.
JP Morgan analyst Edward Yruma agreed for the most part, noting its results were "respectable and demonstrated a modest comp recovery could be under way." He also suggested that the chain may have "gained share during the quarter, a reversal from its competitive malaise against the discounters." Most industry analysts estimate Toys "R" Us has about 22% of the toy market, putting it in a tie for second with Target but well behind Wal-Mart.
But despite those positive developments, it seems likely Toys "R" Us will pursue the sale of its stores to focus on its growing Babies "R" Us division, where sales rose by 1.6% over the holidays. Eyler didn't comment on plans to sell the core toy business, noting that it was still undergoing a strategic review that will be complete by early summer. "The strategic review is designed to ensure that, irrespective of ownership, our business model is one to ensure viability," Eyler said.
Toys "R" Us helped set the table for a potential purchase with a pre-holiday clearance sale on older inventory, which reduced its in-store stock by about 20%. McGowan said that the clearance would "keep markdown activity to lower levels than last year" and "may prove to be a long-term positive for the company."
McGowan also expects Toys "R" Us to close a large number of stores this year whether or not a sale goes through. "I expect them to close their underperforming stores this year regardless of what happens," said McGowan. "You could see about 150 store closings or even up to 200."
That level of closings would result in about a 25% reduction in Toys "R" Us store totals and follow a path the retailer took last year when it closed 146 Kids "R" Us stores and 39 free-standing Imaginarium outlets. But it wouldn't even come close to the downsizing done by fellow specialist KB Toys.
That chain went into bankruptcy for the second time last year after reporting a 10% decline in 2003 sales and has since closed nearly 600 stores. A KB Toys spokesman said the chain currently has 657 stores open, compared to 1,240 in late 2003, but could not comment on its plans for 2005, since it's still in Chapter 11 bankruptcy. KB has not discussed holiday sales or whether it plans to close more stores this year.
The pending merger of Kmart and Sears won't help the troubled retailer, which has stocked seasonal KB Toys at Sears departments since 2001. Neither KB nor Sears have talked about the future of that partnership but it seems likely that Kmart would take care of Sears' toy needs in the future.
KB isn't the only mall-based toy retailer that's fallen on hard times. The Walt Disney Co. sold its 313 Disney Stores to The Children's Place last fall in a long-term deal that will give Disney annual royalties based on sales. Disney operated the chain for 17 years but had been losing money and closing stores since the late 1990s.
The 749-store Children's Place did not break out holiday sales at its Disney Stores, which it officially took over on Nov. 23, but did report a big 21% increase in same-store sales for the holidays and a 15% increase for 2004. The retailer hopes to transfer that success over to its Disney Stores this year with a revamped look and mix of merchandise. |
